Overhead & Profit

Definition

Overhead costs are indirect operating expenses for necessary equipment and facilities that the contractor uses. Profit costs are the financial gains and how a contractor earns a living.

Purpose

Overhead and profit are crucial components of a contractor's pricing structure. Overhead covers the costs of running the business, while profit represents the earnings from the contractor's work, ensuring the sustainability and growth of the business.

Examples of Use

• Construction Bids: Contractors include overhead and profit in their bids to cover business expenses and ensure profitability.
• Project Management: Allocating overhead costs to project budgets for accurate financial planning.
• Financial Reporting: Separating overhead and profit in financial statements to understand business performance.

Related Terms

• Direct Costs: Costs directly associated with a specific project, such as labor and materials.
• Indirect Costs: Expenses not directly tied to a specific project but necessary for running the business.
• Markup: The percentage added to the cost of goods or services to cover overhead and profit.

Notes

• Cost Allocation: Proper allocation of overhead and profit ensures accurate project costing and financial stability.
• Competitive Bidding: Contractors must balance overhead and profit to remain competitive while ensuring business viability.